When we formulate our covered call writing and put-selling portfolios, we are basing our decisions on non-emotional sound fundamental, technical and common sense principles. Similarly, we can analyze a portfolio and determine the investor’s stock and overall market assessments. On November 17, 2017, Carl sent me a list of his very first covered call writing portfolio positions. I felt it would be instructive to analyze this portfolio and interpret Carl’s thought process that led to these decisions.
Portfolio positions in 1-contract increments
Carl’s Initial Covered Call Writing Portfolio
Portfolio calculations using the multiple tab of the Ellman Calculator
Portfolio Calculations Using the Ellman Calculator
Analyzing the portfolio rationale
- The first item that stands out is that all selected strikes were out-of-the-money indicating a bullish market bias. It would also normally reflect that chart technicals were also bullish and confirming
- The average initial return on option (ROO) is 1.9%, a moderately conservative approach to covered call writing because ROO stats reflect the implied volatility of the underlying securities and therefore the inherent risk in our trades
- The upside potential averages to 3.4% reflecting a bullish bias where we want to take advantage of market forces moving share price from current market value up to and beyond the current strike prices sold
- The initial time value returns (ROOs) range from 0.4% to 3.2%. The 0.4% seems to be out-of-place and Carl may have considered not using such a deep out-of-the-money strike in this case. Setting a range for initial time value returns is a critical step in setting up our option-selling portfolios
Discussion
Our portfolio positions should reflect a previous analysis based on sound fundamental, technical and common sense principles. Carl did a phenomenal job of setting up his first ever covered call portfolio based on his bullish sentiment. Once our portfolios are set up, we move from the stock and option selection steps and move into position management mode to see if we can take advantage of potential exit strategy opportunities. .
New book and 3 new calculators now available in the BCI store/ Discount coupons expiring soon
Our new book, Covered Call Writing Alternative Strategies and the 3 new calculators associated with the 3 strategies highlighted in this book (Portfolio Overwriting, The Collar Strategy, The Poor Man’s Covered Call) are now available in the BCI store. We are offering early-order discount promo codes for the book and the 3-calculator package:
newbook5: $5.00 off the price of the new book ($27.00 – $5.00 = $22.00). The book will cost $35.00 when available on Amazon.com.
3calculators20: $20.00 of the price of the 3-calculator package ($79.00 – $20.00 = $59.00)
To receive both discounts, place 2 separate orders.
Upcoming event
Chicago Stock Trader’s Expo: All Stars of Options
Sunday July 22nd 12:30 PM – 1:15 PM
“How to Select the Best Options in Bull and Bear Markets”
Hyatt Regency Hotel @ McCormick Place
2233 South Dr. martin Luther King Jr. Drive
Chicago, IL 60616
Market tone
This week’s economic news of importance:
- Markit manufacturing PMI June 55.4 (54.6 last)
- ISM manufacturing index June 60.2% (58.3% expected)
- Construction spending May 0.4% (0.0% expected)
- Factory orders May 0.4% (0.0% expected)
- Motor vehicle sales June 17.5 million (17.0 million expected)
- ADP Employment June 177,000 (189,000 last)
- Weekly jobless claims 6/30 231,000 (225,000 expected)
- Markit services PMI June 56.5 (56.5 last)
- ISM nonmanufacturing index June 59.1% (58.3% expected)
- Nonfarm payrolls June 213,000 (200,000 expected)
- Unemployment rate June 4.0% (3.8% expected)
- Average hourly earnings June 0.2% (0.3% expected)
THE WEEK AHEAD
Mon July 9th
- Consumer credit May
Tue July 10th
- NFIB small-business index June
- Job openings May
Wed July 11th
- Producer price index June
- Wholesale inventories May
Thu July 12th
- Weekly jobless claims through 7/7Consumer price index June
- Core CPI June
- Federal budget June
Fri July 13th
- Import price index June
- Consumer sentiment index July
For the week, the S&P 500 moved down by 1.33% for a year-to-date return of 1.67%
Summary
IBD: Uptrend under pressure
GMI: 3/6- Defensive signal since market close of June 28, 2018
BCI: Using an equal number of in-the-money and out-of-the-money strikes. Tariffs still a concern.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral tone. In the past six months, the S&P 500 was up 0% while the VIX (13.38) moved up by 40%.
Wishing you much success,
Alan and the BCI team